Sharing Economy

The sharing economy is one of the best examples of permissionless innovation in action today. Just a few years ago, most people had not even heard the term. Today, many of us are active participants in this rapidly evolving sector.

The term “sharing economy” refers to any marketplace that brings together distributed networks of people to share of exchange underutilized assets for profit or fun.

In practice, the sharing economy empowers people to take things they may not be using all the time—such as cars, extra rooms, and even brainpower—and put them to productive use by finding others in need of those items.

Sharing economy platforms harness the communicative power of the Internet to dramatically improve customer/provider feedback mechanisms. User-powered ratings systems help buyers and sellers to overcome “-asymmetric information-” problems that used to complicate exchange—often, these systems work better than traditional regulatory approaches.

The rise of the sharing economy has generated value for users. It has also drawn the ire of legacy competitors and policymakers who are contemplating precautionary regulations. But as Adam Thierer explains in Permissionless Innovation, such policies will serve to undermine the beneficial potential of the sharing economy.

You can find more Mercatus research and commentary on the sharing economy and peer-to-peer platforms below.

In January 2017, the Supreme Court of the United States declined to hear a case brought by Flytenow, an aviation startup, against the Federal Aviation Administration (FAA). While Flytenow’s legal challenge ended when the Supreme Court refused to hear the case, the company continues to have the better policy argument.

In “Defining Common Carriers: Flight Sharing, the FAA, and the Future of Aviation,” Mercatus Senior Research Fellow Christopher Koopman argues that the flight-sharing industry was shut down because the FAA designated flight-sharing services as common carriers, which are subject to a higher regulatory burden than private pilots. The FAA’s definition of common carriage is too expansive and was implemented without oversight from Congress, which has been silent on the issue. Congress should intervene by explicitly defining common carriage narrowly via statute to allow flight sharing.

New technology can cause significant changes in an industry, potentially improving both consumer welfare and governance. The initial reaction of many regulators to the advent of “ridesharing” platforms such as Uber and Lyft was either to outlaw them or to burden them with the same level of regulations as taxis. But policymakers are now beginning to take a new approach. They are aiming to achieve regulatory parity between ridesharing platforms and taxis by deregulating taxis. In this study, the authors determine that taxi regulation is outdated in light of the transformative technology changes and business innovations of the last few years. Now is an opportune time for fundamental reform of the entire regulatory regime to create a fair, open, and competitive transportation market.

This study shows that reputational feedback mechanisms—buyers’ and sellers’ abilities to rate one another and share information about their interactions—can help correct information deficiencies better than traditional regulatory approaches. The Internet and the expansion of the “-sharing economy-” have provided a solution to the information deficiency problem where regulations have been ineffective. The continued use of outdated regulatory approaches may in fact prove detrimental to consumers.

This paper demonstrates that the sharing economy makes Americans better off by offering new innovations, more choices, service differentiation, better prices, and higher-quality services. Unfortunately, many regulatory agencies now seek to apply outdated rules to these services, without evidence that such restrictions will help average Americans. Continued application of outmoded regulatory regimes may harm consumers by decreasing options and driving up prices. A better option would be to roll back old restrictions that limit competition instead of extending them to new businesses.

In this study, economist Robert Krol demonstrates that governments are more likely to set up barriers to new technology when the performance advantage of the new echnology is small or incremental and lobbying costs are low. Incumbent businesses threatened by a new technology may use the government to block businesses using the new technology from entering the market. Ultimately, government protection of incumbent businesses reduces consumer well-being.

Are we becoming a nation of freelancers? Some fear that traditional employment is ending, a phenomenon perhaps driven by the rise of the sharing economy. Others have raised doubts that any changes are afoot in the labor market.

The authors report on new data received from the Internal Revenue Service that shed light on changes in independent contracting. Their data support the claim that there has been an increase in nontraditional employment, but the data refute the idea that this increase is caused by the sharing-economy firms that have arisen since 2008. Instead, they view the rise of sharing-economy firms as a response to a stagnant traditional labor sector and a product of the growing independent workforce.

This paper analyzes how entrenched competitors have sought regulation to undermine new sharing economy upstarts. Threatened taxicab firms are spending scarce resources on contesting wealth instead of creating it, or rent-seeking. The goal of rent-seeking is to create higher profits by lobbying politicians to impose costly regulatory burdens, such as licensure, safety prescriptions, and price controls, on new competitors. This is how entrenched interest groups, citing something like public safety, use government to protect their privileges and stifle market innovations.

In its announcement for the Sharing Economy Workshop, the Federal Trade Commission posed this question: “How have sharing economy platforms affected competition, innovation, consumer choice, and platform participants in the sectors in which they operate? How might they in the future?”

The authors identify five ways the sharing economy is creating value for both consumers and producers: It allows underutilized assets or “dead capital” to be put to more productive use, makes markets more competitive and allows greater specialization, cuts transaction costs and expands the scope of trade, diminishes the problem of asymmetric information between producers and consumers, and allows suppliers to create value for customers long underserved by those incumbents that have become inefficient and unresponsive because of their regulatory protections.